* Audit last year had projected $16.3 billion shortfall
* Policy steps taken since audit have bolstered FHA finances
* Bailout would be first for nearly 80-year-old agency
* FHA has until end of September to decide on need for aid
By Margaret Chadbourn
WASHINGTON, April 10 The cash-strapped Federal
Housing Administration will likely require a $943 million
taxpayer bailout to cover expected losses on loans it insured as
the U.S. housing bubble was deflating, the Obama administration
said on Wednesday.
It would be the first bailout of the government's mortgage
insurer in its nearly 80-year history.
The White House estimated the FHA has about $30 billion on
hand, but said its cash reserves would likely be swamped by
FHA Commissioner Carol Galante said the agency still might
be able to avoid taking aid from the U.S. Treasury, despite the
financial hole projected in President Barack Obama's 2014 budget
proposal. It has until Sept. 30 to decide whether it needs a
"FHA, while still under stress from legacy loans, has made
significant progress and is on a sound fiscal path forward," she
told reporters on a conference call.
In November, an independent audit found that the FHA faced a
projected deficit of $16.3 billion. Since then, the agency has a
taken a number of steps to shore up its finances, including
raising the premiums borrowers pay. Galante said the policy
changes could bring in about $18 billion this year.
The FHA is required by Congress to keep enough cash on hand
to cover all expected future losses and must take a taxpayer
subsidy if its projected revenue falls short.
"Since 2009, administration officials have repeatedly
assured Congress and the American people that FHA was healthy
and on a sustainable financial footing," Republican
Representative Jeb Hensarling, chairman of the House Financial
Services Committee, said in a statement. "The facts, however, as
even the president's own budget now confirms, prove otherwise."
The FHA is a major source of funding for first-time home
buyers and people with modest incomes. It currently backs $1.1
trillion in loans.
Last year, the White House said the FHA would need about
$700 million from the Treasury to remain solvent, but legal
settlements with the nation's largest banks allowed the agency
to avoid an infusion of taxpayer aid.
If the FHA does end up needing to draw on taxpayer funds
this year, the amount of aid "could be a little higher, it could
be a little lower" than the almost $1 billion from taxpayers the
White House has projected, Galante said.
ANOTHER WASHINGTON BAILOUT?
Galante said losses on so-called reverse mortgages were the
main reason the FHA might need a bailout.
Reverse mortgages can serve as financial lifelines by
helping seniors access their equity without selling their homes.
But the reverse loan market has faced growing problems - the
result of sinking post-crash home values.
Given that the FHA's financial situation does not appear as
dire as the independent audit suggested, the latest snapshot of
the agency's health might sap the appetite some lawmakers have
shown to tighten the standards on FHA loans.
The top Democrat and the top Republican on the Senate
Banking Committee have promised to work on legislation to
bolster the agency's portfolio. House Republicans are also
preparing a bill.
"FHA still doesn't have enough capital to squeeze by but
they keep saying not to worry," said Edward Pinto, a resident
fellow at the American Enterprise Institute who is a frequent
critic of the FHA. "They have a huge book of risky loans and
remain incredibly vulnerable, which in turn makes the taxpayer
incredibly vulnerable, to even a moderate economic slowdown."
Critics of the agency often argue the FHA needs to require
more stringent borrowing standards for the loans it insures and
should shrink its market share. They say structural changes are
necessary even if the FHA avoids drawing from Treasury.
Agency supporters and officials say safeguards exist to
ensure that FHA borrowers are creditworthy and that the mortgage
insurer stepped in when private capital dried up and helped
soften the blow from the housing market's collapse.
"By attempting to be all things to all borrowers, the Obama
administration has abandoned FHA's historical mission, it has
endangered the future operations of the agency, and it has put
taxpayers at risk for another Washington bailout," Hensarling